TD Securities strategists see limited scope for a sustained Canadian Dollar (CAD) rally after softer-than-expected September inflation data, despite hawkish signals from the Bank of Canada (BoC). They expect the next BoC rate hike in Q1 2027 and favour fading CAD strength through CAD/MXN. While they see few catalysts for an immediate US Dollar (USD) selloff, they also expect USD/CAD to struggle to sustain a break above 1.43 into year-end.

CAD struggles to sustain gains after softer inflation

"The September CPI report came in softer than expected at 3.1% y/y, up 0.1pp from August, as prices rose by 0.1% m/m (0.118 unrounded). That was 0.1pp below TD and the market consensus for 3.2%, but underlying details were also more constructive and spoke to limited breadth across Canadian CPI, with CPI-trim/median both slowing by 0.1pp to 1.8%/1.9%, respectively (market: 1.9%/2.0%)."

"USD/CAD has recovered some losses after taking heat from the hawkish BoC signal in Macklem's weekend interview. We continue to expect the next BoC hike in Q1 next year."

"As such, the bigger near-term risk is a repricing of the market's remaining 2026 tightening expectations, which we do not view as warranted by the current inflation or growth backdrop."

"While the USD has likely discovered a top, we do not see sufficient catalysts for an immediate selloff for the USD either."

"Data remains unfavourable for any sustained CAD rally. USD/CAD found a top at 1.43, and we prefer to fade CAD strength via CAD/MXN."

"As a result, we are not fundamentally constructive on CAD into year-end, but we also struggle to see a sustained break above 1.43 in USD/CAD, given that the last move to those levels occurred around Liberation Day in 2025 amid a different macro environment."

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